Get With The Plan: May 22, 2011

Heath and Gail are trying to plan the next chapter of their lives. Gail left her full-time job a few years ago, and now that Heath is 60, they’re wondering when it will be his turn.

“We need to know whether we are saving enough for our retirement, when Heath can retire and whether we have a good asset mix,” says Gail, 59. “For retirement, we’d possibly travel more, but essentially maintain our current simple lifestyle. We don’t want to be a burden to our kids.”

Heath and Gail, whose names have been changed, have set aside $105,600 in 401(k) plans, $99,000 in IRAs, $120,800 in annuities, $11,400 in mutual funds, $64,600 in bonds, $78,200 in Certificates of Deposit, $12,200 in a money market, $4,000 in savings and $3,111 in checking.

The Star-Ledger asked Jody D’Agostini, a certified financial planner with AXA Advisors/ RICH Planning Group in Morristown, to help the couple look at their retirement future.

“They are on their way toward meeting the goal of Heath’s retirement, but the path will be a bit longer for several reasons,” D’Agostini says.

Based on their current savings and spending plans, they have about 81 percent of their expenses met for retirement based on one of them living to age 95, D’Agostini says.

For this couple, as for most, the biggest risk in retirement is longevity risk, or the probability of outliving your savings. D’Agostini says soon-to-be-retirees need to look at not only what has been saved, but the fact that inflation averages 3 percent annually. That means you need to continue to increase savings to maintain purchasing power.

“A gallon of milk currently averages $4 per gallon. In 10 years, that same gallon would average $5.88 at our current rate of inflation,” she says. “Many of our living expenses, excepting fixed ones such as a mortgage, will likely inflate in the same way.”

For success in retirement, D’Agostini says, if the couple keeps their current savings and spending rates, Heath should postpone his retirement until 2015, or when he is age 65.

By then, he will have accumulated enough and allowed his current accounts to grow to the level he will need to sustain a long, healthy retirement for the couple. Also, D’Agostini says, it will allow him to have health care coverage — one of the largest challenges for an early retirement.

If Heath left work now, the couple would need to consider health insurance in their budget. At age 60, Heath could have COBRA coverage for 18 months, but that would be 102 percent of his current costs because it would no longer be subsidized by his company. Then, they would have to buy outside coverage for several years until they’re eligible for Medicare.

“This alone makes it unwise to exit from his full-time job at this point,” she says. “These costs could be well over $1,000 per month, and this would drain from their existing savings at a rapid pace.”

Waiting to retire would also give them the ability to postpone taking Social Security benefits until at least both of them are at full retirement age.

D’Agostini says every year you postpone taking Social Security between age 62 and 70, your benefits increase by 8 percent a year.

If waiting isn’t acceptable, D’Agostini says, they would need to save an additional $8,096 per month or set aside a lump sum of $72,196, or cut back significantly on their discretionary spending in retirement.

One potentially large risk for this couple’s plan would be if either of them needed long-term care.

D’Agostini says in New Jersey, assisted-living facilities can cost more than $60,000 a year, and nursing homes can cost more than $85,000 a year.

“Should either one require additional services, their plan would not work,” she says, recommending they consider long-term care insurance to help cover the costs. “It will allow the other spouse to continue using their living expenses while being able to afford the medical services needed for the other spouse.”

The couple also needs to look at their asset allocation. They consider themselves moderate investors based on a risk-tolerance questionnaire, but their portfolio is much more conservative.

Heath and Gail have a large percentage of their assets in cash earning low rates of returns. If they could step up their asset allocation to reflect more of their moderate responses, they could potentially be rewarded by better returns, which could also accumulate more rapidly toward their savings goal for retirement, D’Agostini says.

A change could mean more risk, she says, so they need to be aware that asset allocation does not assure a profit and does not protect against a loss in declining markets.

“Heath and Gail are wise to take stock of what they have and where they are going,” D’Agostini says. “They have the ability now to manage their financial future by making some changes.”